Menu

What I noticed in 2013

I’ve been reviewing my notepad from 2013 and thought I’d share my insights into what’s changed and the big issues from my perspective in startups, business and technology.

Technology is no longer a thing: It’s almost not worth mentioning now it is so ensconced in human life. Business, political and social activities are intertwined in technology as an organism. Having a digital strategy is a bit like having an ‘electricity strategy’ – it’s just nonsense. In fact, if any business still delineates a part of their strategy as digital, then it’s fair to say they have no strategy at all. A terrific piece of evidence for this fact is observing how the technology and business section of the WSJ and New York Times now have a massive overlap.

Social media just is: It’s becoming a bit like general chit chat between any group of friends. A way of communicating. It doesn’t have a nuance or specificity that makes it remarkable anymore. It just is. I guess it’s now just a stage in the evolution of human communication. We could regard this as evidence of its permanence.

Anonymity is the new black: You may remember in the early commercial web era – post 1993, we all had alias names and emails before we felt comfortable enough to convert to our actual human self on line. It seems now that anonymity is back. People wanting to express themselves without it impacting their college application or next job interview. It’s been said that this helped tumblr, and is a large part of Snapchats appeal. As privacy gets eroded through government activity we can expect a lot more anonymous forums to emerge as powerful web platforms. Another outcome is the potentiality for privacy to become a serious luxury going forward.

Email & text on the comeback trail: The inbox has made a comeback for me. This year I signed up to a number of email newsletters which provided a haven of curation in my areas of interest. It might also be that my email address is mine, where social media has the who owns this data issue hanging over it. I also reverted to more text / SMS activity which would’ve been the only domain for my social media a couple of years ago. I think this was facilitated by improved video and photo output of smart phones, the direct & personal nature of people we share with phone to phone. Also the up weighting of data allowances on mobile phone from carriers.

Device equilibrium: All devices are merging to a kind of functionality equilibrium. Phablet anyone? It does seem as though all tech devices can perform much the same function. Now the only differentiator is size preference and UX.

Still waiting for wearables: It feels like we are in early 2000’s phase for smart phones when it comes to wearable computing. We all know we want it, we all know it is inevitable, but no one has quite nailed the technology output yet. Google Glass is the clear front runner, but no one has launched anything yet which has captured the ‘iPhone’ this changes everything moment. Here’s hoping for 2014.

We of things:See above – insert web of things.

The geo layer: Doesn’t seem to me like it can be a point of difference for any web related startup or brand. Foursqaure and others may have missed their chance. It’s a lot like digital now and just exists as an invisible layer on all our output. A vital component to making sense in a technology world, but omnipresent simple and expected.

Long reads: The deminishing returns of news and immediate communication are helping long thoughtful analysis make a comeback. The startup Medium.com seems exciting and longer posts which consider the implications of rapid change are capturing more of my time these days.

Tech valuations & bubblenomics: Crazy company valuations continue to astound. We are absolutely in another technology bubble, this time it is a valuation bubble, rather than an investment boom. I was talking with Nic Hodges about the $3 billion+ valuation of Pinterest proposing that they are like a shopping centre of sorts – a Westfield maybe? His retort was classic. He said:

Westfield owns $20 billion worth of property. What Pinterest owns is some code.

It seems that everyone forgets that valuations must be a function of earnings, or expected future earnings. Here’s a question worth asking when it comes to the true worth of any company. What would you rather own:

Apple stock at a 14 times price earnings ratio?

or

Facebook at a 141 times price earnings ratio?

Do you really think Facebook will be 10 times more profitable than it is now or any time soon? Or that Snapchat with an infinity price earnings ratio (zero earnings on $3.2b valuation) will ever make serious money? There is a very big difference between usage utility and commercial value.

There’s a reason why Warren Buffet has been in the top 2 richest people in the world for the past 30 years – he knows what companies are actually worth. And there’s a reason why many famous VC’s are rich – they are selling you sausages at caviar prices. It seems the real money in technology stocks is made when the founders exit, not when investors buy it.

Well I think the real value of property shouldn’t be a function of the buyers income, but the earning potential of the property. In relative terms most property still hovers around a 20 times price earnings ratio. Much cheaper than any bubble tech stock! Which is at the top end of the historical stock valuations (They usually drift between 10-20x).

Great post Samma, completely agree with “Social Media just is”. The separation of marketing, digital & social media is completely over. Social Media is a part of all activity in marketing & comms IMHO, I’m advising all my clients especially those with social media in their job title to make the change to digital so they look beyond the tweets & posts and realise they are part of the bigger picture. (Won’t hurt their future job prospects either – social media co-ordinator vs digital content producer, I know which one I’d prefer on my CV)

Big learning in this household is changing the dynamics in how we work…. Let’s call it the ‘Freedom of Work’ and ‘working to live not living to work’.
And completely agree with the anonymity comment ;0)

But I see it as my important duty to be the voice of reason in response to your voice of reason on valuations & bubbles.

– Comparing the P/E ratios of two companies of different maturities is fallacious. One is mature with big profits but relatively low growth prospects. The other is still very much in growth phase. FB’s EBITDA doubled in the past year. Apple’s dropped.

– Sure I get that Facebook’s continued growth is questionable and you’ve written about this elsewhere. But I believe Facebook is totally strong enough to keep growing well into the future, and becoming far more profitable than they are now, by doing things we currently can’t yet imagine. For all the stories about how Facebook is dead in the water among teens, what continues to surprise me is how engagement just keeps holding up among “ordinary” people I know. Don’t think for a second that Zuckerburg hasn’t always known that FB would eventually stop being cool, and that they’d need a genius plan for continuing to grow despite that.

– Snapchat: Fred Destin covered this beautifully here: http://freddestin.com/2013/11/snapchat-revenues-debate.html. Can I imagine a multimedia communications platform that is heading towards saturation adoption among a hugely valuable demographic (fashion-conscious, free-spending youth and young-adults) finding a way to build a hyper-targeted location-based marketing platform that could become worth billions? Sure! As an ad-guy I’m surprised you can’t :)

– “Westfield owns $20 billion worth of property. What Pinterest owns is some code.” C’mon that’s a ridiculous comment, you guys are so much smarter than this! What makes Westfield valuable is that it takes property and massively value-adds it to it with its buildings and brand and systems, turning it into a hugely valuable marketplace. Which is exactly what Pinterest is doing with code – only massively more capital-efficiently because they don’t have to own all that property. You guys are advertising/marketing experts. You don’t see the value that Pinterest creates through its ability to capture specific product purchasing intent then enable hyper-targeted marketing?

– Remember all the many people who confidently asserted that Twitter would never make a cent? Do you think they’re feeling at all silly now that Twitter is generating several hundred million dollars a year at rapid growth, with a public-market valuation in the tens of billions? Not at all, they’re all too busy confidently asserting that Snapchat and Pinterest will never amount to anything. In fact a major reason why Pinterest and Snapchat are attracting such big valuations is that Facebook and Twitter have proven that you really can transition from cool edgy social media platform into seriously huge money-making business. The thing is, with this experience, investors are becoming more discerning. People are more adept at picking the indicators of likely success, so all the dollars are focused on fewer companies. So it’s just a supply/demand thing. But if there is a bubble, Pinterest and Snapchat are not the evidence for it. In the context of Facebook and Twitter’s public market valuations, Pinterest and Snapchat seem plausible given their penetration, potential growth and commercial opportunities. Surprisingly high, sure, but not bubble-esque.

– “VCs getting rich selling you sausages at caviar prices” – cheap line and kinda nonsensical. Are you saying that IPOs are overpriced? That’s really for the market to decide. And besides only a tiny percentage of VC-funded startups IPO. VCs make money when they make money for their limited partners by investing in companies that go huge. And when they lose money for their LPs, they personally lose money. It’s a pretty honest system, with incentives all nicely aligned for private and public good. Yeah there are dodgy operators like in any field, but they don’t stay rich for long.

Well that turned out to be long.

I guess this is stuff I spend a lot of time thinking and learning about, out of both fascination and professional necessity.

My point on the valuations is from an ‘Investment viewpoint’ – not a founder or VC view. Do I think Facebook will be 10 times more profitable than it is today? No. This would be especially difficult given it already has 1/6 of the world using it.

Don’t get me wrong about pinterest and others. I do think they are viable businesses and will earn significant money, but I’d rather invest once they’ve started earning respectable ratios. High valuations have historically lead to earnings catching up to the in market price, not the other way around. This in turn means that the rational financial play is to wait for earnings, knowing the price won’t move much. Rather than to speculatively chase capital growth. My equity investment strategy has always been indexing in shares, but to build a highly valued company myself or get in early (Adioso), needs to be part of every entrepreneurs investment portfolio – and certainly something I’m gunning for. Who wouldn’t want a $3b val on a company :-) The key is knowing the difference between when we are a beneficiary or a fool.

Yes, I am saying that most IPO’s are seriously over priced.If you’re an investor, rather than a speculator. And I put myself in the former category :-) The data on tech IPO’s is very clear that FB and Twitter are the exception. I tend to invest on probability.

You should definitely blog more. Rich discussion is what we need in times of rapid change :-)

– I think the thing that bothers me seeing you waste time questioning valuations of big VC-funded or listed companies is that it’s based on what Hayek called the “pretence of knowledge”. Speculate as I might, in truth neither you nor I can possibly know how Pinterest or Snapchat will monetise or how profitable Facebook will be in 5 years. So it’s a waste of time to make judgements about what the valuations should be right now. We can and should leave that to the market. Sure – we shouldn’t buy their stock, but who among your readers was going to anyway? The reason I love the Sammartino Method so much is that it embraces the idea that we just don’t know enough to make judgements about valuations so we should just leave it to the market. So let’s just stop wasting time quibbling over valuations and focus on things we do understand :)

– That said, in your second paragraph, all you’re saying is that you prefer stocks with low risk/low growth/high yield. That’s a fine position for you to take, but it’s just your personal risk profile, not an objective judgment on how valuable Facebook really is.

– I read that Roy Murdock post when it was published. I think Fred Destin’s post trumps it by a mile. All he’s saying is that he can’t imagine a way of monetisation that will work for Snapchat. But that’s just a comment on his imagination, not reality. I’ve seen how advertising works on Vine, and how effective it is. So yeah, I can imagine some ways Snapchat could monetise. I can also imagine they could come up something that none of us can imagine right now. And I remember how everyone said Twitter will die with advertising. The opposite is happening. But I know this: Snapchat’s VCs are among the smartest in the business. And they know the only way they’ll exit their investment is through a very big IPO, and that can only happen once there’s huge revenue. So, you can bet they’ve thought a hell of a lot about it. (If IPO happens before revenue, then we’ll be able to say we’re in a bubble, but let’s wait till that happens.)

The value of any property, wether virtual property like Pinterest or real property like Westfield, is not in the asset itself but in the cash flow that property can generate. It doesn’t matter if you are the biggest landowner around if you can’t generate an income from it. Same with an online property. The only difference is that they aren’t making any more real property whereas virtual property is only as limited as your imagination.

And on the wearables front, Google Glass in without doubt the technological leader but until it becomes less obtrusive and more streamlined, it will remain a geek toy rather than a revolution in personal technology.

Adding to the above comments from Tom and Steve, there are a couple of other things I think should be considered by personal investors, either for tech stocks or for investment in general:

1. The benefit of self investment: This cannot be overstated. If I’m a high school dropout earning $36k per year but can complete a degree and become a teacher earning $55k per year upon graduation (assuming instant employment and retention of that employment), my circa $30,000 investment decision has a significant Net Present Value.
2. Net Present Value: This is hard for some to get their heads around but is a very useful metric.
3. Opportunity Cost: Putting my money into Apple or Facebook prevents me from using it in other opportunities. I might for example be able to pay off a credit card (assuming I had one) that has an interest rate of 38% when all costs are factored in.
4. Risk aversion: If we are anything like Tim Ferriss, chances are we will spend 50x more time worrying about losses than focusing on increasing income. The best way to test this is with small losses, with a view to seeing how you cope with the loss of say $100-200 after losing it in a game of poker. Nobody can really determine their emotional response to loss, so it better to experience it on a small scale and see how you respond.
5. Information Advantage: I only know about a handful of areas (small business, franchising, etc.). My knowledge in these areas makes me much more informed to make wise decisions. These are the areas in which I feel most confident investing. As an example, I know I could review a retail franchisee’s P&L and determine within a few hours if/how I could improve the Net Profit of the business. I don’t know enough about tech businesses to be able to analyse that information, so I opt out of making those investments (though I can observed Apple has been developing good buying steps for some time, since the release of the first iPod, I don’t know how to cut costs on the development or manufacture of the technology to improve the bottom line).
6. The best post I have read on the stock market was written by Mark Cuban in 2004 and reposted in 2013. It is great. In it, he shows how as someone who sold his business for several billion dollars to Yahoo and how as the owner he was amazed virtually no one asked about important metrics like P/E ratios, etc. He said if they did they never would have been successful, but because they new how to market the IPO the business was huge in the media and was bought on emotion by Yahoo. Because his shares were locked in for a minimum of two years, he then shorted the quantity his shareholding to protect his investment for this time. It was during this time the dot com bomb happened. He walked away with his capital preserved while other people lost a lot of money who had not accurately assessed price, earnings, income, expenses, risk and reward.

Josh, interesting you should point out Cuban selling Broadcast.com as that is what pretty much started the dotcom era. That business actually had revenue but Yahoo paid a ridiculous amount for what it was.

Having had my own dotcom experience I really have trouble with the philosophy of don’t worry about the revenue just get the eyeballs. There are more car wrecks that used this philosophy than there are success stories.